Japan Auto Makers Face China Headache

The dust may be settling on the now-ended strike at Honda’s plants in China over the past couple of weeks, but Japan’s auto industry has some serious thinking to do. How exactly is it going to serve growing demand in one of the world’s most important markets?

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Workers walked off the job at Honda factories in China in May, demanding a wage increase.

At least, Toshiyuki Shiga, the newly appointed chairman of the Japan Automobile Manufacturers Association, believes it’s a serious issue. At a meeting with reporters last week Mr. Shiga, also the chief operating officer of Nissan, said that while “It’s natural” that Chinese workers should ask for pay raises. After all, the strong demand for cars there means they’ll have to make more and more cars. But for Japanese auto makers, seen as lagging international peers in making inroads in what is already the world’s biggest auto market, rising labor costs are exactly what they don’t need as they consider shifting production capacity to China to meet demand.

According to Mr. Shiga, there’s still a clear way forward for Japanese auto makers to progress in China – drawing on their own experience at home. “Low labor costs don’t necessarily guarantee production continuing forever,” he said. “Workers…need to improve productivity through efficient operations. Japan used to be a low-cost country…Labor costs are much higher now. But they are still surviving. That’s because they have worked on improving productivity at the same time,” Mr. Shiga said.

Still, there could be a way for Japan’s auto makers to serve growing demand overseas without actually building factories there. If incoming Prime Minister Naoto Kan’s previously expressed wish a significantly weaker yen were to come true, for instance, Japan’s auto plants could be in the envious position of being able to churn out high-quality, cheaper cars for export, much more productively than overseas plants. And that might be an enticing proposition for a government keen to spur domestic industries and preserve Japan’s manufacturing backbone.

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Japan Real Time is a newsy, concise guide to what works, what doesn’t and why in the one-time poster child for Asian development, as it struggles to keep pace with faster-growing neighbors while competing with Europe for Michelin-rated restaurants. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, the site provides an inside track on business, politics and lifestyle in Japan as it comes to terms with being overtaken by China as the world’s second-biggest economy. You can contact the editors at japanrealtime@wsj.com